After I switched some wallpapers manager apps I got the problem: XFCE4 Wallpaper only display in black and white. I have managed to fix the issue partially, by removing and reinstalling
gdk-pixbuf2 – which I recall threw some errors during the system update. However, all custom (jpeg or png) wallpaper images are displayed in black and white once they are set as wallpaper.
In the ‘Desktop Settings’ menu / wallpaper chooser within XFCE settings I can once again recognise jpegs as image files, and view them in colour, as I can in any file-manager that I use., though they appear in b&w once set as wallpaper. Also – all desktop icons are in colour, and I can set background of any panel to a jpeg and it will appear in colour – so it appears to be only the desktop that is affected…
I spent a time to researching about this problem then I found the cause of XFCE4 Black & White Wallpaper is I may have accidentally set the saturation of the wallpaper to 0
To fix it, just run this from the command line and see if it helps
$ xfconf-query -nRt double -c xfce4-desktop -vp /backdrop/screen0/monitor0/saturation -s 1.0